DeFi Defined: Making Decentralized Finance Intuitive for Everyone

Imagine a financial system where you control your money, not a bank. A system where loans, savings, and even trading happen without middlemen. That is the exciting world of Decentralized Finance, or DeFi for short. DeFi has emerged as a revolutionary force in the financial world, promising to democratize access to financial services and eliminate intermediaries. However, for many newcomers, the world of DeFi can seem like a labyrinth of complex terms and intimidating protocols. For a platform that wishes to bank the unbanked, there is a fundamental problem of understanding. In this article, we will explore the basics of DeFi and how good UX can be applied to generate more reach and adoption.

Traditional Finance (TradFi) vs. DeFi: A Game of Trust

Right now, your bank is like a gatekeeper. They hold your money, facilitate transactions, and offer loans, all with transaction fees and interest. This centralized system relies on trust – trust that the bank is secure and will manage your finances responsibly. But over time, the banks have proven to not be as bankable. DeFi flips this script, to a large extent. It builds on blockchain technology, primarily the Ethereum blockchain, the same system that powers cryptocurrencies and peer-to-peer transactions. Blockchains are like public ledgers, recording transactions transparently and securely. In DeFi, these ledgers power applications (called protocols and decentralised applications (dApps)) that handle your finances. No banks, no gatekeepers – just you and the code. 

We call these codes smart contracts, and they automatically execute predetermined actions based on predefined conditions. Once deployed, the code cannot be altered or tampered with, ensuring that the rules and conditions are enforced consistently and transparently for all participants. This autonomy and immutability create a self-regulatory environment where the "code is law" – the smart contract's logic becomes the ultimate controller of transactions and financial interactions within the DeFi ecosystem. So once again, no banks, no gatekeepers - just you and the code.

Your DeFi Toolbox: Exploring What's Possible

Interestingly, DeFi offers a surprising range of financial tools. These do not just replicate traditional finance. They unlock new possibilities and new risks.

• Non-custodial Wallets: Unlike custodial wallets offered by centralised exchanges like Binance, where they hold the private keys to your crypto, non-custodial wallets put you in charge. You have complete control over your private keys, the passwords that grant access to your crypto. This empowers you and eliminates the risk of a third party restricting your access. However, with great power comes great responsibility. Being in full custody of your wallet means you are solely responsible for safeguarding your private keys.
• Trading: Forget traditional capital markets. Decentralised exchanges (DEXs) are like peer-to-peer marketplaces for virtual assets. Uniswap, SushiSwap, and PancakeSwap are popular examples. Here, you trade directly with other users, cutting out the need for a central authority. This boosts transparency and puts you in control of your trades. Plus, anyone can participate, without the need for extensive KYC, promoting financial inclusion. 
• Borrowing and Lending: Imagine getting a loan without a bank. DeFi lending platforms like Aave, Compound, and Maker make this possible. You can lend your virtual assets to earn passive income or borrow funds (often with over-collateralization, meaning you deposit more crypto than you borrow) for various purposes. This opens doors for both individuals and institutions.
• Stablecoins: Stablecoins are the glue that holds DeFi together. These cryptocurrencies are pegged to real-world assets like the US dollar, offering price stability in the often volatile crypto world. This makes them ideal for everyday transactions within DeFi, the same way cash works in TradFi. However, while some stablecoins are backed by actual dollars (like USDC), others rely on smart contracts to maintain their peg (like DAI). Understanding how stablecoins are backed and how they keep their pegs is important. Without a stable peg, they lose their flavour. Remember the UST incident in 2022? It highlights the importance of understanding how stablecoins are backed before using them.

• DeFi Asset Management: These work like automated financial advisors, creating and managing investment portfolios made up of different DeFi tokens, to help you diversify your holdings. In this instance, it is crucial to remember that someone would still need to hold your crypto and there can be conflicts of interest between the managers and investors.
• Prediction Markets and Derivatives: Prediction markets allow you to bet on the future - from election outcomes to whether it is going to rain tomorrow. They also offer derivative products, which include futures, options, swaps, forward contracts, and collateralized loans, all built on the DeFi framework. Exciting as they are, these platforms raise questions about ensuring fair markets and preventing manipulation. 
• DeFi Insurance: DeFi can be a bit like the Wild West, with potential risks from bugs in the code (smart contract vulnerabilities) or even hacks. DeFi insurance protocols like Nexus Mutual step in to offer coverage against these risks. However, they are still evolving, and questions remain about how much coverage they can provide and how claims will be settled.

• Yield Farming: One of the most exciting aspects of DeFi is the concept of yield farming and liquidity mining. Platforms like Yearn Finance and Harvest Finance allow you to earn rewards by essentially "fueling the fire" of DeFi. Imagine getting rewarded for supplying crypto to a DeFi marketplace. That is the core idea behind yield farming and liquidity mining. By depositing your crypto into liquidity pools, you help ensure there are enough funds for smooth trading within DeFi protocols. In return, you earn rewards, often in the form of tokens issued by the protocol itself. This incentivizes users to participate, creating a self-sustaining ecosystem for DeFi. Yield farming can be a tempting way to earn high returns in DeFi, but it comes with challenges. The strategies can be complex, requiring you to constantly move your crypto around. There is also a risk of impermanent loss, where you could end up with less than you invested due to price fluctuations. Overall, yield farming takes time, effort, and knowledge to navigate successfully.
• Decentralized Governance: DeFi is not just about replacing middlemen in financial transactions. It also transforms traditional governance models. Many DeFi protocols are decentralised autonomous organizations (DAOs). DAOs are community-run organizations where decisions are made collectively, not by a single CEO. The community using governance tokens vote on proposals that affect the protocol's future, like fee structures or new features. This fosters transparency and empowers users to shape the DeFi landscape they participate. DAO governance is still evolving and reaching consensus among a large group of token holders can be slow. There is also the risk of proposals being manipulated by whales (large token holders) who can exert undue influence.  Additionally, ensuring well-informed decision-making requires a certain level of technical literacy among token holders. Despite these challenges, decentralized governance represents a fascinating experiment in collective decision-making. As DeFi matures, DAOs have the potential to revolutionize how online communities are governed.

Each of these tools can be aggregated to form more complex DeFi products, which is why people refer to DeFi as a financial LEGO. For example, a user could borrow assets from a lending platform, provide liquidity to a DEX, and then stake the resulting tokens to earn yield, all within a single integrated interface. While this may present more opportunities to users, it warps the already tangled web of understanding DeFi operations.

The Need for Intuitive Interfaces

DeFi does offer exciting possibilities. It is decentralised, permissionless, transparent, autonomous and globally accessible. Still, it often presents significant barriers to entry for new users. While some user experience pain points may be unique to certain products, here are some easily identifiable examples currently in the space:

• Complexity: Understanding concepts like smart contracts, yield farming, and decentralized governance requires time and effort. New users are usually bombarded with complex terminology, unfamiliar interfaces, and multi-step processes.
• Choosing the Right Tools: With the rapid growth of DeFi, finding the right DeFi tools and understanding features still poses a major challenge for beginners and experienced users alike.
• Cryptic Copy: Cryptic copy is a hallmark of many DeFi platforms, with many abandoning traditional terminologies for newer terms which align with their brand names. For example, Beanstalk a permissionless fiat stablecoin protocol uses terms like seasons, soil, field, barns, pods etc. to represent different aspects of their DeFi protocol. These terms can be categorized as "bean-related" metaphors to represent functions like deposit periods, collateral backing, yield generation pools, smart contract vaults, and individual investment units within the Beanstalk protocol. While these can be unique, it can leave users frustrated and confused.
• Limited Risk Awareness Tools: Many platforms do not effectively communicate the inherent risks involved in DeFi activities. These include smart contract vulnerabilities, volatility, hacks, and phishing scams that can lead to the permanent loss of users' virtual assets.
• Unclear Feature Explanations: Complex DeFi features often lack clear explanations, making it difficult for users to understand how they work and the potential drawbacks. A few try to attach whitepapers, which remain bulky and complex and further deter the user from digging deep to understand how to use features.
• Lack of Security Education: While some platforms offer security resources, there is still a need for clearer and more comprehensive guidance on key management and security best practices.
• Information Overload: The DeFi space is constantly evolving and keeping up with the ever-changing landscape requires constant learning and research. There are so many terminologies and slang all over today. It can be difficult for users to separate reliable information from hype.

How UX Design Can Make DeFi Intuitive

To truly democratize finance and take a step towards banking the unbanked, DeFi needs to become more accessible and user-friendly. Here are some ways UX designers can make DeFi more intuitive for everyone:

• Simplified User Interfaces: DeFi platforms should focus on creating clean, easy-to-navigate interfaces. Clear and concise interfaces with intuitive navigation can significantly reduce the overwhelming feeling new users face. Similarly, using clear labels, icons, and search functionalities can help users find the DeFi tools they need without getting lost in a maze of options. Provide options for users to toggle between beginner-friendly dashboards and more advanced ones instead of hurling all the information at them.
• Contextual Onboarding System: Implement a dynamic onboarding system that surfaces relevant explanations and definitions based on user actions or the current interface element. UX designers can implement pop-up tooltips with clear and short breakdowns of terminology.
• Interactive Feature Demos: Instead of bulky whitepapers, utilize interactive demos that showcase how features work with real-time data visualizations. UX designers can implement walkthroughs with step-by-step animations and clear explanations of potential risks and rewards.
• In-App Knowledge Base: Create a comprehensive knowledge base within the platform that serves as a central hub for all user inquiries. Imagine a searchable database with FAQs, tutorials, a glossary, and in-depth explanations of DeFi concepts with rewards for completing bite-sized lessons. Gamification is the best way to pass knowledge (cue in Duolingo).

• Risk Assessment Tools: Implementing clear risk indicators and explanations can help users make informed decisions about their investments. User interface elements can play a role in highlighting potential risks through colour-coded warnings that appear during high-risk actions or features, prompting users to acknowledge the risks before proceeding.
• Standardization: As the DeFi space matures, standardizing certain processes and terminologies across platforms could reduce confusion for users. We can hope to have uniformity across the board just like we have in traditional fintech applications. Uniformity brings familiarity. Familiarity in turn brings confidence.
• Mobile-First Design: With many users accessing financial services primarily through smartphones, optimizing DeFi applications for mobile use is crucial. Some founders may have to consider USSD-enabled features where possible for wider reach. This especially applies to a continent like Africa where a majority of the unbanked are in underserved communities with little or no access to digital devices.
• Natural Language Processing: With artificial intelligence booming, it may be considerable to implement AI-powered assistants that can understand and respond to user queries in plain language. This could greatly enhance usability.
• Community-Sourced Q&A Forum: A platform-specific Q&A forum where users can ask questions about features and get answers from experienced users or platform moderators can be integrated into the application.

The Future of DeFi: Accessibility and Innovation

By making DeFi more intuitive, we can unlock its potential to provide financial services to the unbanked, offer new investment opportunities, and create a more open and transparent financial system. The challenge lies in simplifying complex financial and technological concepts without sacrificing the core principles of decentralization and user autonomy. As more user-friendly DeFi solutions emerge, we can expect to see wider adoption and integration of these technologies into everyday financial activities. Interested in exploring DeFi tools? Here are some tips:

• Educate Yourself: There are plenty of beginner-friendly resources online. Start with reputable websites and educational videos.
• Choose a User-Friendly DeFi Platform: Look for platforms with a clean interface and good user reviews. Popular options include Uniswap, Aave, and Compound.
• Start Small: Don't jump in head first. Experiment with a small amount of crypto to get comfortable with the platform before committing more.
• Stay Safe: Never share your private keys (passwords to your crypto) with anyone. Beware of phishing scams and double-check website addresses before connecting your wallet.